What Is Tax Audit? Rules and Types

Getting a notice from the IRS or another tax authority about an audit can feel pretty scary. But it might not be as terrible as you think. Contrary to what many believe, an audit doesn't always mean trouble or a long, stressful process. In fact, it doesn't automatically mean someone will come knocking on your door or that you're in serious tax trouble.

What Is Tax Audit?

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Why Is A Tax Audit Conducted?

Who Needs Tax Audit?

1. Businesses: If your total sales, turnover, or receipts surpass Rs. 1 crore annually, you must undergo a tax audit in India. Additionally, if you're a professional with receipts exceeding Rs. 50 lakh, such as an engineer, architect, interior decorator, lawyer, or doctor, you're also eligible for a tax audit. You can find the complete list of eligible professionals in Rule 6F of the Income Tax Rules, 1962.
2. Presumptive Taxation Scheme: If you've opted for the presumptive taxation scheme and your total sales or turnover exceeds Rs. 2 crore, you're required to undergo a tax audit. Moreover, if your actual profits are lower than what's determined by the presumptive taxation scheme, you must conduct a tax audit to validate this.
3. Penalties: Failure to comply with the stipulated tax audit requirements may result in penalties. However, according to Section 273B, there are exceptions where not filing your tax audit report on time is permissible. These exceptions include instances like natural disasters, strikes, theft of documents, or the resignation of the auditor.

Who Conducts Tax Audit?

Types of Tax Audit

Field audit: This happens at your office, but sometimes it can be at your representative's workplace. You'll need to give them the required documents if it's at their place.

Office audit: This occurs at an IRS office. You'll get a letter listing the documents you need to bring along.

Correspondence audit: Here, the IRS sends you a letter asking for documents to clarify or fill in missing information on your tax returns. You just need to mail the documents as instructed.

How to Complete a Tax Audit in India?

• Form 3CA: Use this if you're a company or professional needing a mandatory tax audit.
• Form 3CB: For businesses or professions not legally required to undergo a tax audit.
• Form 3CD: This is like a detailed report of your business and its transactions. Form 3CE: NRIs and foreign companies should submit this if they receive fees or royalties from Indian entities or the
• government for technical services.

Ways to Lower Business Tax Bill

1. Buy in Your Business's Name: Purchase items like computers or vehicles under your company's name to claim depreciation, reducing taxes.
2. Treat Utilities as Business Expenses: Expenses like electricity or internet bills can be deducted, cutting down taxable income.
3. File Taxes on Time: Filing on or before the deadline not only keeps you compliant but also allows you to carry forward business losses for up to 8 years.
4. Stay Informed: Keep up with government policy changes to maximize deductions tailored for small and medium businesses.
5. Deduct Business Expenses: Costs like travel or client entertainment can be written off, but you must keep thorough records.
6. Leverage Start-Up Expenses: Preliminary costs incurred before starting your business can be spread out over five years for tax benefits under section 35D of the Income Tax Act.